Release potential

This year has been a boom period for the equity-release market, with lifetime mortgages and reversion plans breaking the 1bn-a-year barrier and the signs are that 2005 will see further growth. Worries about regulation and possible wobbles in the housing market are receding and more firms are poised to enter the equity-release market.

For many people, this would be a cue for celebration and to some extent it should be. The industry is providing a good service and sales are rising massively yet we could be doing a lot better.

Research shows that the UK’s 11 million retired people own around seven million homes together worth 1tn. This is the size of the market we should be aiming at.

It is admittedly a bit difficult to comprehend but, for the record, 1tn is a thousand billion or 1,000,000,000,000 whereas 1bn is a mere 1,000,000,000.

Of course, not every single retired person is going to release all the equity from their home but we believe the market is drastically underperforming and it is the industry which is at fault.

We commissioned a report by Professor Merlin Stone of Bristol Business School which we believe gives a much clearer picture of what is happening in equity release and what should be happening.

The first point to make is that equity release is not a truly accurate description of the market. Talking about capital release would be better but essentially there is more to the business than lifetime mortgages and reversions. They are in fact only around a quarter of the market which we estimate is closer to 3.96bn.

More money is being rel-eased by people selling their homes and trading down to smaller houses or by people moving into retirement homes after selling their family house.

Our research shows that around 100,000 people released capital – or equity if you prefer – last year, taking an average 40,000 a time. That is already a big market to aim at as many of these people are simply getting a cheque and no advice on what to do with their money. IFAs ought to be targeting these people and providing them with a service.

However, the most intriguing part of our research by TNS was about intentions for the future. Over the next three years, around 152,000 people are planning to release equity from their homes, adding up to around 9.52bn of business. Another 752,000 people aged 65 or over believe they will release capital but are undecided about how much they will release.

You may say, wow, what a market, what an opportunity and you would be right – up to a point. Certainly, it is imp-ressive that 904,000 retired people are planning to release some money and that the market can expect at the very least 9.52bn of business, with the prospect of billions more once the undecided do their sums.

But we believe the killer question was when resear-chers asked people what they would do if the industry offered more flexible and straightforward products.

The answer was that an additional 301,000 who currently have no plans to do anything would release at least 11.41 bn. That would at a stroke double the market. Incidentally, another 1.12 million people would also be tempted to tap into the wealth in their homes. This is an impressive extra 1.4 million people who would want to use IFAs’ services if equity-release products were more flexible.

In fact, it is not impressive but rather depressing. There are at least 1.4 million people that we are failing to serve and these are people who really need our services. At least one in five pensioners lives below the poverty line, according to Help the Aged. We all know about annuity rates and pensions and poor investment returns. These really are people who in terms of their houses are asset rich and cash poor. Our research shows they have debts of 8.4bn. Around 580,000 of them still have mortgages while 1.15 million are using credit cards to fund their lifestyles. Some 23,000 have personal loans of more than 20,000. It is easy to say that products should be more flexible and straightforward because everyone is in favour of straightforwardness and flexibility. What does it mean in practice?

To some extent, it is simple. It is just a case of IFAs doing what they do already but doing it better. People taking equity out of their homes need advice and to develop a stra-tegy to deal with their sudden windfall. This could include specially tailored advice or products designed to provide an income. It should certainly include advice on tax and benefits.

The changes required bec-ome a bit more complex when it means companies offering a wider range of services and products. Currently, many firms only target niches and offer a one-size-fits-all app-roach. This includes firms which, for instance, only sell to the over-70s or which specialise in lifetime mortgages. There needs to be a culture change.

Companies should look at a package rather than just a product. Customers might need help to sell their homes and find a new more suitable one. Deals can be put together which allow customers to afford homes they do not think their finances would stretch to.

However, the big question is portability or perhaps so-called portability. Many companies say their equityrel-ease schemes are transferable from house to house and sometimes they are. There are, however, restrictions which apply and which customers often do not find out about until the restrictions apply to them.

Our experience is that customers buying equity-release products often find their circumstances change quickly. When this happens, firms should be flexible but unfortunately they often are not.

For example, a couple might take out a lifetime mortgage on their home because they want to stay there. However, within a few years, their health deteriorates and they want to move. They then find the equ-ity-release company will not let them move as they retain the right to veto. The industry needs standards supporting a more flexible approach.

Nobody is perfect and we freely admit that but we can spot an opportunity and we think we can see how to take advantage. It is just that we all need to change if we are to benefit.

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